Pmac Module 1 Session 3 Zara Case

Session Three Exercise

Vertical Integration vs. Outsourcing

Date: October 12, 2010

Session Three Exercise

Vertical Integration vs. Outsourcing

1. (i) How is Zara organized with respect to its vertical integration and outsourcing decisions? (ii) What governance structure does it appear to follow? Support your conclusions with reference to details of the Zara case and the Ferdows reading.

(i) Zara is primarily a vertically integrated company. Half of Zara’s production is in house. A larger portion of Zara’s raw materials are supplied from their own company (Inditex and Comitdel). Zara retains ownership over all retail stores unlike their competitors whose stores are franchised out. There are some aspects of Zara’s business that are outsourced but this represents a small percentage of their operations. Zara produces their intricate products in house and outsources the basic and stable products to Asia and the Middle East. They also outsource sewing to small local workshops and northern Portugal. Zara has found the optimal balance of vertical integration and outsourcing that is supported by their organizational structure and strategy; this has allowed them to gain a competitive advantage over its competition.

• “It buys 40% of its fabric from another Inditex firm, Comditel…and it purchases its dyestuff from yet another Inditex company”(Ferdows, pg 5).

• “Zara designs and distributes all its products, outsources a smaller portions of its manufacturing that its peers, and owns nearly all its retail shops”(Ferdows, pg 4).

• “Zara outsourced production of some items with comparatively stable and predictable demand patterns like men’s dress shirts” ( Mcafee, Dessain & Sjoman – Zara Case pg 7).

(ii) The fundamental principle that defines Zara stems from Amancio Ortega, Zara’s Chairman, belief...